[photopress:Shanghai_apartments_1.jpg,full,alignright]There is a contradiction here. A government clampdown on the construction of luxury apartments is combining with loose enforcement of limits on property investment by foreigners to send Shanghai property prices sharply higher.
The Shanghai government increased the tax on property sales in early 2005, following nearly three years in which hot money, looking to benefit from China’s booming economic growth and a then-anticipated increase in the value of the renminbi, poured into the luxury real-estate market.
The stream of funds caused the price of some luxury apartments to soar. Since the tax increase was implemented, such prices have barely kept pace with inflation.
Investment is picking up again, led by buyers from Hong Kong and Taiwan. According to agents and analysts the new buyers have been taking note of lax enforcement of rules announced a year ago that were aimed at limiting foreign buyers to a single property in China.
Eric Lee, director of residential sales at Savills Property Services in Shanghai, said, ‘Local governments haven’t followed through completely on the central government’s ruling.’
He said local tax bureaus were seeing declines in their revenues after the new rules were issued, so local authorities eased enforcement after central-government scrutiny of the issue relaxed.
Analysts say many foreign investors have bought multiple properties since then, pushing high-end residential prices up as much as 30% in some parts of downtown Shanghai during the past three months.
According to data from CB Richard Ellis, the June volume of new apartments bought in Shanghai’s downtown area by square meter was more than double that of March, traditionally a slow time of year, and 30% higher than when Beijing introduced measures to cool the market in early 2005.
The trend has caught the attention of the authorities. The Shanghai branch of the China Banking Regulatory Commission, in a statement Monday, said foreigners and non-local Chinese accounted for 34.4% of all residential-loan recipients in the city in June, up from 24.7% in December.
Given limitations on foreigners buying Chinese stocks and bonds, real estate has been one of the few renminbi-denominated assets in which foreigners can speculate on the Chinese currency.
With the renminbi widely expected to gain 5% against the U.S. dollar in the next 12 months and to continue rising indefinitely after that, foreign investors can afford to pay high prices for real estate.
Eric Lee of Savill said, ‘Even though some of the properties may end up with low rental yields, that’s fine as long as investors sustain the daily cost of the property,’ like management fees and mortgage servicing.
He said, ‘Hold the property for five years and between renminbi appreciation, rent and asset appreciation, you could have an almost guaranteed return of 8% or 9%.’
Source: Wall Street Journal